The FMA is considering regulatory action against three QFEs because of failures in the way they deal with insurance replacement business.

It has completed a review of the insurance practices of QFEs around replacement business and found there are particular conflicts of interest they need to manage, and it's not convinced they're doing it.

The regulator found fewer than half the firms advised customers that replacing their insurance could lead to worse cover or loss of benefits.

Replacement business forms were used as a risk management tool for insurers rather than to help customers with their decision-making.

None of the insurance providers had an independent process to distinguish between new and replacement business.

Liam Mason, FMA director of regulation, said it was disappointing that there were a couple of QFEs who, despite all the attention the regulator had put on insurance replacement business, did not seem to have paid any attention to its messages at all.

“It’s pretty disappointing that there are still some that don’t even have their advisers recognise replacement business as a particular transaction that poses a risk to customers.”

The review showed the FMA was right to put the focus on insurance practices, he said, which delivered $2 billion in premiums a year.

“The majority of insurance sold is replacement and there are real risks to consumers. This tells us we are right to keep the pressure in there.”

The FMA had previously had a focus on the advised distribution channel, he said. “It’s only right to also turn out attention to the big firms and ask is it any better here? We found some good practice but we also found some areas where it was not up to scratch.”

He said QFEs needed to recognise they had specific potential conflicts of interest that needed to be identified and managed. “That needs to be done thinking about the risks to consumers and how to improve the customer experience.”

Those firms where problems had been identified would be given a chance to engage and then, if it’s determined they had breached their obligations, could be censured privately or publicly, given a direct order or fined.

He said, while FSLAB would introduce clearer standards for all advises and a more level playing field, all QFEs already had an obligation to put adequate consumer protections in place – and the review showed some had still not met those.

Among the findings

One entity has no process in place when it comes to replacement business. They ask their staff not to facilitate or manage the replacement of life policies but there are no controls in place to ensure that this actually happens. Ultimately, no advice is provided and the customer carries full responsibility to determine whether the entity’s policy meets their needs.

One entity has no oversight process in place and simply cautions their customer about potential risks without further elaborating on them.

One entity has only one particular team that is allowed to process replacement business. These advisers are encouraged to prepare one sentence where they describe differences between policies; besides this they rely heavily on scripted generic talking points.

One entity has no oversight process but instead relies on underwriters to identify replacement business. Since a customer decision has already been made at this point, we consider this, at best, an indicator of replacement after the fact. The entity also looks at adviser persistency ratios, which the FMA said it considered to occur in the entity’s interest rather than to protect customers.

One entity does not provide personalised advice as part of their QFE distribution method but relies on class advice. As part of the “welcome” documentation, the customer is provided with a generic message, prompting them to compare their new policy with their old one in case of replacement. The comparison is reduced to two factors: the amount of cover and premium cost. This supposed warning message is not provided at any time earlier in the process when helping the customer in the decision making. The only oversight that the entity maintains is a quality assurance process that focuses purely on QFE adviser competency.

One entity feels that since their QFE advisers sell products online or over the phone, there is no need for a replacement business form. It is unclear whether replacement is addressed as part of this distribution method. For their external financial adviser network, they use replacement business forms that appear to be purely geared towards calculating commission payments. The form still needs to be signed by the entity’s customers since they have to commit to cancelling their original policy once the new one has come into effect. There is no evidence of the entity cautioning the customer about potential adverse outcomes of replacing their policy.

One entity only identifies and tracks internal replacement business. Therefore, replacement business between other insurers is neither captured nor identified. Without even a basic mechanism of identification, there is no way of providing their customers with good advice or mitigating the inherent risks of replacement business. The FMA said it was difficult to see in this example how the QFE was protecting the consumer from the harms of poor quality advice or a poor outcome from replacing their insurance policy.

Comments from our readers

On 18 July 2018 at 1:13 pm Donald said:

I doubt that I would be presumptuous in thinking that these QFE's would somewhere in their business name have the word Bank included.
Lets hope the FMA applies the full force of their strength and not just "consider"

It’s interesting to see that from the FMA information, about 30% of QFE’s are non-compliant when it comes to replacement business while as a conservative estimate only about 3% of advisers assessed by FMA where non-compliant.

This likely will not surprise many practitioners but it may help the FMA to come to terms with the fact that many of the ills of our profession are driven by product providers over advisers.

On 18 July 2018 at 2:05 pm Dirty Harry said:

If a random punter finds a random Adviser, and askes them to 'look over' their insurance, what are the odds of a 'poor outcome'?

If that same random punter visits a randomly selected QFE and asks the same question, what are the odd then?

The secret to digging for gold is to figure out where the gold is most likely buried, and go dig there.

On 18 July 2018 at 3:53 pm Skeptical said:

I know of one QFE (yes, with 'Bank' in their title) that intentionally removed the word 'advice' from their BRA. With the intention to stop their staff providing advice on the matter. The implication being that if the client chooses to replace the policy, they chose it, it's their fault if they're disadvantaged.

I find it very hard to believe the client would have sufficient knowledge of their policy wordings/UW Terms benefit levels or pros and cons of each company to make that decision.

This sort of behaviour quite clearly doesn't put the clients’ interests first, it puts the QFE's with their incentive not to have claim disputes. This is far worse than being incentivised by any commissions or overseas trips. I think we probably can all agree it's high time that the FMA actually does look behind the curtain and take action.

On 18 July 2018 at 4:28 pm mike6156@gmail.com said:

So this is what the FMA have found so far without an open public enquiry such as happened in Australia. Didn’t The bureaucrats, banking and insurance mandarins assure et all this type of behaviour wouldn’t be happening in NZ.

It begs the question if all disclosures have been made and no more surprises are lurking in plain sight. I won’t be expecting any more censure for the guilty QFE’s than a severe private and confidential telling off by the FMA.

On 18 July 2018 at 5:14 pm Chatterbox said:

As a private independent project into insurance sector mismanagement and misconduct I can only say this is the tip of a very large ice-berg.

The real issue is why so much goes undetected in the self-regulated market place.

Why regulators turn a blind eye until questions arise from Australia. Its because Government wants us all to believe self-regulation deregulation works. If you find problems then it proves the ideology does not work.

Its a crime to conceal fraud that is systematic and that is all I can say at this stage. Watch this space !!! And advisers need to wake up their act and complain when they see policy and insurance company tricks instead of closing their eyes while getting super commission incomes. Conflicts of interest abound in the sector and directors enjoy massive multimillion dollar incomes that force them to silence all that may expose an industry out of control.

On 18 July 2018 at 9:09 pm Ron Flood said:

It's time, once again, for the FMA to get out their wet bus tickets and feather dusters and give these miscreants a right royal thrashing.

On 19 July 2018 at 9:53 am Mike Naylor said:

I'd like to congratulate the FMA on focusing on QFEs. Many in the adviser community thought that the FMA would give the large institutions a free pass. Not so. On the up-side, AFAs are implicitly being given a tick.

On 19 July 2018 at 10:33 am Murray Weatherston said:

@Mike
It's a strange old world when an academic congratulates a regulator for simply doing their job.

On 19 July 2018 at 11:29 am My Thoughts 2 said:

Have observed that for years.

On 19 July 2018 at 2:34 pm Murray Weatherston said:

Given that
(1) FSC has a Business replacement form that is supposed to be filled in every time a policy is replacing an existing policy; and
(2) I think 8 of the 11 firms surveyed are members of FSC -
can anyone explain why 8 of the firms in the survey didn't get 5 Gold Stars for knowing whenever a replacement policy was being issued? Or could some firms have a deliberate policy not to ask about existing insurance because if they don't know, somehow their obligations and liability are reduced?
Also, I found it interesting that in a survey on "advice", there were at least 30 references in the report to sales or selling or some derivative of those terms. Yes, I'm afraid, possibly another "unintended consequence" of treating sales as advice.

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